Application of Sales Tax in Illinois

April 4, 2016

State Laws You Should Know

Bill Ward, Executive Vice President, HBAI

Illinois is one of 45 states that impose a general sales tax. Most state sales taxes were enacted during the Great Depression to make up for the significant decline in property tax revenues. Mississippi adopted the first sales tax in 1932, Illinois followed suit in 1933 with a temporary tax that became permanent in 1935.

The Illinois “Sales Tax” is actually made up of several taxes; the most common being the “Retailers Occupation Tax” which is assessed on the gross receipts retailers collect from selling tangible property in Illinois. A “Use Tax” is assessed on consumers who make out-of-state purchases for tangible property that will be used in Illinois.

The “Service Occupation Tax” and the “Service Use Tax” are imposed on tangible property purchases incidental to purchasing a service, like buying a part when your car needs repair. These four taxes make up what in Illinois is referred to as our “sales tax.”

The state sales tax rate has been 5% since 1984; but a 1.25% local sales tax was added to the 5% in 1990. In addition to the 6.25% rate, local government units may now impose additional levies, increasing the sales tax rate from jurisdiction to jurisdiction. For example, Chicago adds an additional 1.25%, Cook County adds .75%, and the Regional Transportation Authority imposes a 1% sales tax, which, in total, imposes a 9.25% sales tax on purchases in Chicago. Like Illinois, many states allow the local government sales tax, including all of our neighboring states.

New Focus on Taxing Services

American purchase patterns have changed over the years. In 1965, 51% of our Gross Domestic Product was the purchase of services while 41% was the purchase of tangible goods. In 2012, 72% of our GDP is the purchase of services, only 17% is on the sales of goods.

“Following the money,” many states have expanded their sales tax base to include services while Illinois has not. The Federation of Tax Administrators (FTA) identifies 168 taxable services; Illinois taxes 5 of them. Compare our 5 taxable services to our neighboring states:

Of the 45 states with sales tax, Illinois ranks 45th in the number of services subject to its general sales tax.

The Illinois General Assembly has yet to pass a budget for FY2016, and we are already into the 4th month of our new fiscal year. Legislators are contemplating the expansion of services taxed and at least one proposal has been laid out that would potentially increase our state revenue by $2.1 billion. The proposal contains 68 services to be added to the Illinois sales tax base.

Even Governor Rauner mentioned in his “State of the State” address last February that he would be open to expanding our tax base, but only if it is bundled with a list of economic reform measures that Democratic leaders oppose at this time.

Adding pressure for substantial tax base change is the temporary income tax increase enacted in 2011 that sunset on January 1, 2015, leaving the state with a recurring $1.3 billion loss to the General Revenue Fund. Re-establishing this tax level coupled with the new sales tax base would enhance state revenues by $3.4 billion.

Impact to Home Building & Remodeling

The HBAI Board of Directors approved expenditures in June to pay for a study conducted by NAHB to estimate the impact that this particular sales tax expansion would have on our industry. We received the 25 page study in August and I will share with you a summary of the study here.

Based upon a proposal to expand the Illinois sales tax base put forth by the Center for Tax and Budget Accountability, and the Taxpayer’s Federation of Illinois; NAHB believes the proposal will not affect new home construction, based on the proposal’s exclusion of business-to-business transactions to avoid tax pyramiding that would, in effect, raise final consumer prices beyond in excess of the statutory tax rate.

However, the impact on residential remodeling will be substantial, as the sales tax proposal does apply to all services provided by contractors to final consumers (i.e. homeowners). Here are the numbers.

NAHB estimates that in 2015, $5.2 billion in residential remodeling in Illinois would be affected. For this $5.2 billion, the expansion of the tax would cause the cost of remodeling to increase by 4.25%, and the amount of remodeling in Illinois would decline by $222.5 million in 2015 as a result.

The one year impact of losing $222.5 million in remodeling would include:

$203 million less income for Illinois residents,

2,630 fewer jobs in Illinois, and

$37.1 million less in revenue for the state government and local governments within the state, partially offsetting the additional sales tax revenue.

In addition, on an ongoing basis, the impact of losing $222.5 million in residential remodeling would be

$4.5 million less in residential property taxes for local governments in the state.

Let’s be clear about two things here; the non-impact on new home construction is not expressed; it is through the application of avoiding “tax pyramiding” that home building may be without impact within this particular sales tax design. Substantive language within legislation has not been produced yet and it could happen that home construction, in finality, would be impacted either by statute or administrative rule. Secondly, home remodeling is a major concern to the Home Builders Association of Illinois. Regardless of any exemption for new home construction, whether expressed or by default, HBAI will remain opposed to increased taxation on the home remodeling industry should this proposal gain consideration within the hearing rooms and chambers of the Illinois Statehouse. 2630 jobs are at stake here.

Engage – Educate – Enhance

It is now that we engage our members to become involved on this issue. We must educate our HBA members, our elected officials, and the press, as to the impact that increased taxation will have on our economy and on our industry. Only by doing so, may we enhance our ability to build in Illinois and become a stronger association, industry, and state.

In the upcoming days, we will target the following officials with our message on sales tax expansion.

If you wish to be a part of the program, contact me and let me know that you are willing to step forward on behalf of our great industry. I will work through your local association and will supply you with position papers and will come to your area to meet with you and your area Senators and Representatives on this important matter. The time is now to get the word out.

Also, if you would like copies of the sales tax proposal or the NAHB study, please to write me at billward@hbai.org, and I will send you copies by pdf.

This is our next big issue, and as slow as the Illinois General Assembly seems to be; once this is on the table, it will happen fast.